Monthly Archives: October 2012

Contrarianism is running rampant. Go to a local bookstore and you will note countless “what you know just ain’t so”-type arguments. I am beginning to wonder if this type of trend downplays serious analysis and leaves us open to any argument regardless of whether it is blatantly incorrect. A case in point is a recent op-ed in the New York Times entitled, “Why Chavez Was Re-Elected.”

The op-ed purports that Chavez was re-elected because his policies have been successful. According to the op-ed:

Since the Chávez government got control over the national oil industry, poverty has been cut by half, and extreme poverty by 70 percent. College enrollment has more than doubled, millions of people have access to health care for the first time and the number of people eligible for public pensions has quadrupled.

According to survey evidence by the World Bank, poverty has fallen in Venezuela. However, it is important to put this in context. The earliest data that we have available on poverty from the World Bank is from 2002 and according to the survey the poverty rate was around 60%. It has come down appreciably since. However, this statistic and the corresponding claims in the op-ed ignore what is driving these measured changes and the long-run implications thereof.

Throughout Chavez’s tenure, he has seized thousands of businesses and imposed controls on foreign exchange as well as strict price controls. Any improvement in economic statistics in this type of regime is meaningless. The reason is because Venezuela is experiencing extractive growth. We know from economic theory and historical experience that extractive growth cannot last. (We need only look to the last 15 or so years of research by Daron Acemoglu and James Robinson to understand this conclusion.) The improvement in the statistics that the author highlights are merely the result of the fact that Chavez has seized control of the oil companies and uses revenues to finance social programs. Extractive growth, however, deters foreign direct investment and it reduces the incentives to innovate and re-invest in existing businesses. More broadly, higher risks of expropriation lead to lower income per capita. Meanwhile, according to Bloomberg, price controls have created shortages in “everything from electricity to sugar and beef.”

The author, however, seems to believe that Chavez and others like him have discussed some alternative to “neoliberalism” to foster growth. This view is misplaced. Where so-called neo-liberalism has tried and purportedly failed is in countries that have insufficiently inclusive societal institutions. Yet the author seems to accept correlation as causation in these cases.

If this is where the op-ed ended, I would conclude that the author’s assertions were misguided, but would be content to agree to disagree. However, the author’s claims only become more dubious as the op-ed proceeds. For example, he argues:

Not surprisingly, the leftist leaders have seen Venezuela as part of a team that has brought more democracy, national sovereignty and economic and social progress to the region. Yes, democracy: even the much-maligned Venezuela is recognized by many scholars to be more democratic than it was in the pre-Chávez era.

I’m not sure what I am to make of such a dubious statement. Chavez controls the voter rolls. There have been no external audits of the election. In addition, according to this piece in the Wall Street Journal, there are 10,000 voters who are registered between the ages of 111 and 129. Perhaps Chavez has also improved longevity!

Markets and migration also tell a different story. Since 2000, approximately 120,000 Venezuelans have migrated to the United States. To put that in perspective, that represents a 125% increase in the number of Venezuelans in the United States. In addition, Chavez’s victory was met with a sharp decline in the price of Venezuelan bonds, which had previously rallied on the prospect of his defeat.

Curiously, there was also no mention of lawlessness, violence, and kidnappings under the current regime. One Venezuelan criminologist says that there have been over 155,000 murders in Venezuela during Chavez’s tenure. Gangs rule the streets of Caracas and many crimes go unsolved. This is evident in news reports, but I also know this from talking to Venezuelans who have left.

The op-ed seemingly seems impervious to facts as well:

After recovering from a recession that began in 2009, the Venezuelan economy has been growing for two-and-a-half years now and inflation has fallen sharply while growth has accelerated.

According to the World Bank, inflation has been very high. Over the last three years, consumer price have risen by 27.1%, 28.2%, and 26.1%, respectively. When measured by the GDP deflator, inflation has been even worse. Over the last five years, annual inflation by this metric has been 15.4%, 30.1%, 7.8%, 45.9%, 28.1%, respectively. And this is in the context of a regime of strict price controls and therefore there might be reason to believe that these number understate the actual inflation rate. To put this in perspective, Bloomberg reports that out of all of the countries that they track, only Iran and Belarus have higher rates of inflation than Venezuela.

Venezuela is not prospering and Chavez has not discovered an alternative path toward economic growth and prosperity. The Chavez regime is an extractive regime. There are no incentives for long-run growth, inflation is high, lawlessness is rampant, and there are serious reasons to doubt the validity of the election process. This is the reality. And all of this is contrary to the recent New York Times op-ed.

Suppose that prior to the recession, I told you that I had a theory of the business cycle. My theory suggested that shocks to net worth were a significant explanation of the business cycle. Following a shock to net worth, consumption, investment, and hours worked would decline. Suppose that I also told you that increases in the monetary base by the Federal Reserve would keep inflation close to the implicit objective, but have little effect on consumption, investment, and real GDP. Given the events of the last four years, this theory seems to fit pretty well with what we have actually observed. What might surprise you, however, is that the framework I am describing is a real business cycle model with financial market frictions. This view seems largely consistent with James Bullard’s interpretation of events.

Suppose instead that I told you that I had the following theory of the business cycle. My theory suggested that liquidity shocks were a significant explanation of the business cycle. Following a shock to liquidity, and without appropriate Federal Reserve policy, nominal and real GDP would decline and unemployment would rise. In addition, suppose that I told you that if the Federal Reserve increased the monetary base without an explicit target or goal that such an expansion would have little effect on real economic activity. Given the events of the last four years, this theory seems to fit pretty well with what we have actually observed. This view is largely consistent with Scott Sumner’s interpretation of events.

I have used these two examples to illustrate a couple of points. First, neither Bullard nor Sumner (or anybody else associated with similar views) are crazy. They have logically consistent ideas that are consistent with casual observation. Second, confirmation bias is dangerous. It is very tempting to have a theory, look at the world, observe events consistent with your theory, and conclude that your theory is correct. But that is just confirmation bias. What is necessary is to provide evidence to support your theory in light of other theories that have observationally equivalent observations. This is substantially harder to do — even for those who realize it is necessary. Third, and perhaps most importantly, the ability to distinguish between these and other competing theories is incredibly important given the vastly different monetary policy implications.